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1 3 June 2014 Volume 5 Issue 6 The Blotter presents ITG s insights on complex global market structure, technology, and policy issues. Measuring the Trading Activity at the Open and Close Auctions Around the Globe CONTRIBUTORS Milan Borkovec Managing Director Head of Financial Engineering Konstantin Tyurin Director, ITG Analytics Denizhan Alparslan Vice President, ITG Analytics CONTACT Asia Pacific Canada EMEA United States INTRODUCTION ITG Financial Engineering has recently completed its R&D work on international stock-specific intraday volume profiles, extending its robust estimation methodology to common stocks and several other security types to cover more than 50 markets around the world. 1 The intraday volume profiles, which include the estimated percentages of the daily volume to be traded in each 15-minute interval of the continuous trading session and at the opening and closing call auctions, are estimated for individual traded on each market and can be used for efficient execution of large orders. The U-shape of the intraday profiles is an important stylized fact, which is largely robust to the execution mechanisms in individual markets and well documented for most of stocks traded in various market environments. 2 Many popular trading tools such as the volume-weighted average price (VWAP), participation rate (PWP), and implementation shortfall (IS) algorithms require the intraday volume patterns as key inputs. The opening (market-on-open, or MOO) and closing (market-on-close, or MOC) call auctions, as implied by their names, take place at the beginning and the end of the core trading session. Both auctions have periods when orders can be entered, modified or cancelled but trades do not take place until the call time. During those periods, an equilibrium price at which trades would be executed if the auction period ends is calculated in real time according to the rules capturing the interaction of demand and supply in the market. MOO and MOC weights and the intraday volume profiles in general became an important part of the modern toolkit used in pre-trade and post-trade analytics. For instance, intraday weights are utilized in pre-trade models to calculate implementation shortfall for VWAP-style execution strategies. These weights are also built into the interface of ITG s Smart Trading Analytics (STA) to analyze the available volume at the opening and closing auctions for more than 50 markets around the 1 Details of the stock universe and some relevant summary statistics can be found in Tables 1A-1E of the Appendix. 2 Recently, the intraday volume patterns became more reminiscent of a J-shape, as the percentage of trading immediately before the market closing has been on the rise in last several years. For international markets with mid-day lunch breaks, the intraday volume profiles are typically W-shaped.

2 2 world. Traders have to keep an eye on the MOO and MOC auction volume analytics for many other reasons: a) More natural liquidity is usually available at and around the market opening and closing times. Liquidity-seeking market participants may prefer trading at MOO and MOC, close to the beginning and end of the continuous trading sessions despite the elevated volatility risk at those times. b) To avoid the risk of carrying a large position overnight, traders may want to participate in MOC auctions, as long as it enables them to close the unwanted positions without incurring substantial price impact. 3 c) Index and mutual fund managers often benchmark their executions to the opening and closing prices, hence may be incentivized to fill large portions of their orders at MOO or MOC. In what follows, we discuss the differences in shapes of the intraday volume patterns and, especially, the MOO and MOC percentage volumes across the most important markets around the globe. 2. RESULTS The fractions of daily volumes traded at the opening and closing auctions for individual stocks are intrinsically noisy and fluctuate significantly over time. However, the average fractions of the daily volumes traded at MOO and MOC, where the averages are calculated for the given ticker over prolonged periods of time (more than 3 to 12 months), are relatively stable. Figure 1 shows the time series plots of the percentages of daily volumes traded at MOO and MOC for British Petroleum (ticker BP) during the period between December 2012 and December 2013, as well as their 60-day moving averages, which generally fluctuate in the vicinity of 1 for MOO and 16 for MOC and exhibit no apparent trending behavior. The highlighed points on the plots correspond to the special trading days such as option expiration days, Federal Reserve OMC meeting days, last days of the month, and U.S. market holidays. These special days generally exhibit different liquidity patterns in comparison to the regular days, and are excluded from the sample used for estimation of MOO and MOC weights. 3 MOC orders should be used with caution, details of the closing price determination can depend on market- and security-type. Depending on the design of the closing auction, the fill of an order submitted for execution at MOC may be not guaranteed.

3 3 FIGURE 1: The time series plot of MOO and MOC percentage volume weights for British Petroleum PLC (ticker: BP, : GBR) in Daily MOC percentage for BP 11/27/ /06/ Daily MOO percentage for BP 11/27/ /06/ MOC special days MO all days MA regular days MA all days Figure 2 presents the stability plots for the MOO and MOC percentage volumes for the most liquid common stocks traded in each country. The estimated percentage volumes traded at MOO and MOC are measured over two non-overlapping one-year time periods 2012 and 2013 and plotted against each other. As can be inferred from the concentration of points on the stability plots along the 45-degree diagonal lines, the percentage volumes traded at MOO and MOC auctions remain quite stable over time. Only a handful of stocks exhibit big changes in their MOO and MOC auction percentage volumes. FIGURE 2: Comparison of MOO and MOC stability over time MOO for most liquid all s MOO in MOC for most liquid all s MOC in MOO in 2012 MOC in 2012 Europe Asia Africa & Middle East s Americas Australia & New Zealand s

4 4 Even though the key underlying mechanisms of the closing and opening auctions are similar across the markets, the rules, design, and details of the implementation of the auctions may vary substantially. For example, some stock exchanges such as SIX Swiss Exchange and Bolsa de Madrid do not hold closing call auctions for ETFs. Many exchanges only allow sufficiently liquid to participate in their end-of-day call auctions. Some markets allow for extensions to their auction call periods during the closing auction under some circumstances. 4 In contrast, the stock exchanges in Germany, Australia, and Sweden have a fixed duration for their call periods. Some markets allow market-on-close, limit-on-close, and other order types to be submitted at any time before the close, while other markets lock all the MOC orders submitted, allowing only offsetting limit-on-close orders once the net imbalance has been publicly disseminated. Details of the rules pertaining to opening and closing call auctions can be found on the exchange websites. 5 Partly because of the opening and closing call design, and partly because of the natural position of the market trading hours on the global 24-hour financial cycle, we observe significant differences in the average trading volume percentages traded across countries at their opening and closing auctions, and in the average volumes traded early and late during their trading days. Figure 3 summarizes the percentage trading volumes for MOC vs. MOO, as well as the percentages of daily volumes executed late vs. early during the trading day in the local market 6 for the most liquid segments in all covered markets. FIGURE 3: Opening and closing auction percentages for all markets, and early vs. late trading percentages for all markets, based on the 10 most liquid in each market MOC vs. MOO for all s 30 Late Trading vs. Early Trading for all s 40 MOC 25 ESP 35 ESP 30 PHL IRL 20 AUT HKG 25 IRL AUT CAN MYS SGP USA TWN AUS SGP 15 TUR 10 FIN GRC ITA NZL TWN KOR EST 10 JPN GRC ISR 5 CAN JPN RUS USA KWT LTU CYP TUR 5 RUS KOR CYP MOO Early Trading Europe Asia Africa & Middle East s Americas Australia & New Zealand s Late Trading 4 London Stock Exchange can extend the call period up to three times, invoking either a market order extension (when the indicative auction match price results in unexecuted market orders) or a price monitoring extention (when the gap between the indicative auction match price and the reference price exceeds pre-specified parameters). Toronto Stock Exchange extends its call period by ten minutes if the calculated closing price exceeds the volatility parameters determined by the exchange. BM&F Bovespa allows its closing auction to be extended by one minute multiple times whenever there are changes in the theoretical price, quantity, new offer modifying the taken quantity, and balance not taken up. 5 For the U.S. and Canadian markets, see also the ITG articles papers/inside_opening_ Auction.pdf, and com/2012/04/18/ coming-changes-to-the-canadian-market-on-close-facility/. 6 Early trading includes MOO volume and the volume during the first 30 minutes of continuous trading after market opening. Late trading includes MOC volume and the volume during the last 30 minutes of continuous trading before market close. Regulatory imbalances occur in about 8.7 of cases in Q

5 5 The average late trading across all active European markets is around 20, with most of the values between 17 and 23. Spain has the highest closing auction percentage (25) and late trading percentage (34), well above any other European averages. Ireland and Austria have the second highest closing auction percentages and late trading percentages (slightly above 25). Russia has the lowest MOC percentage (0.8) followed by Cyprus (1.5), Turkey (3.8) and Greece (6.8). The average early trading across all European markets is around 8. Cyprus and Greece have the highest early trading percentages, that are close to 17 and 15, respectively. Ireland, Finland, and Austria have the lowest early trading percentages. The Cyprus and Athens stock exchanges open a half hour after the major European markets. Their high early trading percentage might reflect the fact that the investors trade on news from other major European markets. Turkey and Greece close earlier than major European markets, so there is no reason for the investors in those stocks to rely heavily on the liquidity at the closing auctions. Similar to the European markets, the average late trading percentages for traded in the Asia-Pacific region are centered around 20 for most of the stocks in that region. Philippines has the highest late trading percentage of 32 due to its short trading hours. The average early trading percentage in Asia-Pacific markets is about 14, which is significantly higher than the average early trading percentage of 8 across European markets. Taiwan, Japan and Hong Kong have the highest early trading percentages. The significantly higher average early trading percentages for Asia-Pacific markets in comparison to European markets can be partly explained by the relatively short contunuous trading sessions for most countries in the Asia- Pacific region. This might be also attributed to the tendency of Asian traders to open or close their positions early in the morning in response to overnight news from North America. We also observe that the early trading and late trading percentages are negatively correlated. Figure 4 shows the scatter plot of early trading percentages vs. late trading percentages for the 20 most liquid traded on the most active European markets in September Stocks with the highest late trading percentages are mostly listed in Spain, and some are in Ireland, while the stocks with the highest early trading percentages are mostly listed in Greece and some are in Italy.

6 6 For most of the European markets, MOO and especially MOC percentages for ETFs are relatively small. While ETFs listed in Poland, Switzerland, France and Netherlands have the fractions of daily volumes traded at the opening auctions larger than 3, only the ETFs listed in France, Netherlands, United Kingdom and South Africa have the fractions of daily volumes traded at the closing auctions larger than 1. In some countries such as Switzerland, Finland, Sweden, Turkey, Norway and Spain, ETFs do not participate in the closing auctions. FIGURE 4: Early and late trading activity for 20 most liquid in each of the major European markets Late Trading Early Trading Other s' ESP GRC IRL 3. CONCLUSION This article reviews stylized facts about the trading activity at and around the opening and closing call auctions on stock exchanges around the world and discusses the empirical evidence for their robustness and temporal stability. The intraday trading volume profiles provided by ITG Financial Engineering are now available at the individual security level for more than 50 countries around the globe. Institutions focusing on executions of large orders often target their transactions to the opening and closing times, the amount of natural liquidity and its diversity tends to be at the highest, and require accurate estimates of the percentage of daily volumes executed around those times of the day to guide their trade scheduling decisions. Users of the intraday volume profiles have to be aware of the differences between the shapes of intraday volume patterns and MOO and MOC percentage volumes across individual markets and, and modify their strategies appropriately. Granted, those patterns are purely statistical in nature and hence do not answer important questions about the ultimate causes of the differences between different markets and. Nevertheless, we suggest several possible sources of those discrepancies, both institutional and geographical, that may be explored in future research.

9 9 TABLE 1D: Summary statistics for active Americas s MOO USA x x Dec-2011 CAN x x Dec-2011 BRA x x Dec-2011 MEX x x Dec-2011 COL x x Dec-2011 TABLE 1E: Summary statistics for Australia and New Zealand MOO AUS x x Dec-2013 NZL x x Dec Investment Technology Group, Inc. All rights reserved. Not to be reproduced or retransmitted without permission Broker-dealer products and services are offered by: in the U.S., ITG Inc., member FINRA, SIPC; in Canada, ITG Canada Corp., member Canadian Investor Protection Fund ( CIPF ) and Investment Industry Regulatory Organization of Canada ( IIROC ); in Europe, Investment Technology Group Limited, registered in Ireland No ( ITGL ) and/or Investment Technology Group Europe Limited, registered in Ireland No ( ITGEL ) (the registered office of ITGL and ITGEL is Block A, Georges Quay, Dublin 2, Ireland). ITGL and ITGEL are authorised and regulated by the Central Bank of Ireland; in Asia, ITG Hong Kong Limited (SFC License No. AHD810), ITG Singapore Pte Limited (CMS Licence No ), and ITG Australia Limited (AFS License No ). All of the above entities are subsidiaries of Investment Technology Group, Inc. MATCH NowSM is a product offering of TriAct Canada Marketplace LP ( TriAct ), member CIPF and IIROC. TriAct is a wholly owned subsidiary of ITG Canada Corp. The opinions, positions, and/or predictions taken or made in this document reflect the judgment of the individual author(s) and are not necessarily those of ITG. These materials are for informational purposes only, and are not intended to be used for trading or investment purposes or as an offer to sell or the solicitation of an offer to buy any security or financial product. Nothing contained herein should be relied upon as a representation, guarantee, or warranty as to the reasonableness of the assumptions or the accuracy of the sources used by the author(s). These materials do not provide any form of advice (investment, tax or legal). ITG Inc. is not a registered investment adviser and does not provide investment advice or recommendations to buy or sell, to hire any investment adviser or to pursue any investment or trading strategy. All functionality described herein is subject to change without notice.

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